The Fibonacci sequences and ratios are a much used tool in Forex Trading. The two most used tools in this specialized tool are Retracement and Extension.
Fibonacci was an Italian mathematician who discovered a series of numbers which described ratios and the natural proportions present in things in the whole universe. The sequence of numbers is as follows:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 ...…………….
The sequence derives it values by adding numbers to each other – starting with o+1=1, 1+1=2, 1+2=3 and so on. As we get to higher numbers, if you measure ratios of one number the next higher one, you will get .618. ie: 34/55 = .618. Try measuring ratios between alternate numbers and one gets .382. ie: 34/89 = .382. These ratios are known as the “Golden Mean”. These numbers have found their perfect place for use in the Forex market as predictors of trends and have been proven right, time and again.
Fortunately, charting software is available to do all these calculations for the traders. But it is a good idea to know the basic theory and functions behind this indicator to use it effectively.
The two most used Tools are Fibonacci Retracement Levels and Fibonacci Extension Levels. The ratios used are as under:
0.236, 0.382, 0.500, 0.618, 0.764
0, 0.382, 0.618, 1.000, 1.382, 1.618
This tool is used to study trending patterns in the market. Accordingly, the trader will decide to go long or buy when the Fibonacci levels are showing that the market is going up. The other option is go short or sell when the retracements or the market is showing a downward trend. To find the retracement levels, you have to look at the recent Swing Highs or Swing Lows which will be quite significant.
A Swing High looks like a candlestick with at least two lower points of highs on either side – to the left and right of itself.
A Swing Low is the reverse of the Swing high with the points pointing downwards.
To see how this tool works, try the following experiment. For a downward trend, click on the Swing High and drag and drop cursor to Swing Low to get the range. For an upswing trend, do the opposite.
Fibonacci retracement levels are used by traders to chart support and resistance areas in the market. It is used to place buy and sell orders on trades or to place stops on orders. These tend to act in a predictable fashion become what is termed as a “self-fulfilling prophecy”.
This tool is used to find targets. As an example, when a trader wants to make a profit in an uptrend cycle by using the Swing High and Swing Low points. This shows the ratios and price levels corresponding to all the points in a chart. Fibonacci extension levels are used to increase profit taking. Many traders watch these levels to put in buy and sell orders to make a profit. This tool works more often than fails.
The Forex software is a great way to see how the trends are working in the market. The retracement tool shows when Swing Low and Swing High points occur in the market.
As per this example, 61.8%, 100% and 161.8% levels would be “the spots” to cash in on profits in the market. As one can see, these tools work well in helping people in the Forex market make a lot of money. It is a great idea to get familiar with these tools and reading charts while you still have an amateur trading account before going live and start trading in the market to make most of your investment.